Guidance from the Court on managing a liquidator's potential conflict of interest in Ex Parte Greg Quin as liquidator of Flexi Staff Pty Ltd (In Liquidation) [2023] WASC 362

Introduction

‍In Ex Parte Greg Quin as liquidator of Flexi Staff Pty Ltd (In Liquidation) [2023] WASC 362 (Flexi Staff), a liquidator sought directions on the adjudication of proofs of debt where a potential conflict of interest arose.

This article provides an overview of the process by which liquidators can seek the direction of the Court, as well as guidance on how to manage potential conflicts of interest that can arise for insolvency practitioners during the course of their appointment. Pragma Lawyers acted for the liquidator in the application to the Court.

‍Application for Directions

‍The application for directions was made to the Court pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) (Schedule 2 of the Corporations Act 2001 (Cth)).

As noted by Justice Hill, s 90-15 is broad in its scope and allows the Court to make orders as it thinks fit in relation to the external administration of a company.[1] The Court's scope is however, limited in the sense that the Court will only provide a direction on a legal issue of substance or procedure, or the powers, proprietary or reasonableness of a decision of an insolvency practitioner.

The Court will not, for example, on an application for approval of a transaction or agreement under s 477(2B) of the Corporations Act 2001 (Cth), concern itself with the commercial desirability of that transaction or agreement.[2] The Court may only consider evaluating the commercial judgment of an insolvency practitioner where there appears to be a lack of good faith, error of law or principle, or a real and substantial ground for doubting the prudence of the decision being made.[3]

‍Seeking Directions on Adjudicating Proof of Debts

‍The conflict which arose in Flexi Staff was that the liquidator of Flexi Staff was also the liquidator of a related entity that had lodged a proof of debt. Justice Hill acknowledged that such a situation will give rise to an actual or potential conflict of the liquidator's duties in the administration of both companies.

A similar conflict was faced by a liquidator in the matter of Go Energy Group Ltd [2019] NSWSC 558 (Go Energy). In Go Energy, Justice Black confirmed that the Court had the inherent power to authorise a liquidator to perform an action that would otherwise involve conflict.

The task to obtain a direction where a conflict arises has been described as an "onerous and exacting" one.[5] However, it requires the liquidator to put all available information before the Court and be able to demonstrate the investigations and analysis of the materials. This may involve also obtaining an independent expert report, although this is not mandatory.

In circumstances like those that arose in Flexi Staff, because liquidators must adjudicate on a proof of debt in a quasi-judicial capacity to standards 'no less than that of a judge',[6] the Court is usually in a position to be well-equipped to form a view on the application without the need for an independent expert report.[7]

‍Takeaways for Insolvency Practitioners

‍Insolvency Practitioners should be conscious of the broad scope of s 90-15 and the ability of the Court to provide guidance and directions. When conflicts or potential conflicts arise, insolvency practitioners should be proactive to seek advice and, where appropriate, the direction of the Court.

‍If you require assistance in relation to any of the information provided above, contact Pragma Lawyers' insolvency specialists for expert advice at hello@pragma.law or call (08) 6188 3340.

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Footnotes:

‍[1]Ex Parte Greg Quin as liquidator of Flexi Staff Pty Ltd (In Liquidation) [2023] WASC 362 at [16] (Hill J).

‍[2] Vardy v Linz, in the matter of Bondi Pizza Pty Ltd (in liq) [2021] FCA 530 as cited in Rathner v Fopar Nominees Pty Ltd, in the matter of Reliance Franchise Partners Pty Ltd (in liq) [2022] FCA 1313.

‍[3]Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnet [2015] NSWCA 85 at [125]

‍[4]Ex Parte Greg Quin as liquidator of Flexi Staff Pty Ltd (In Liquidation) [2023] WASC 362 at [16] (Hill J) at [21] and [26]; Re Richstar Enterprises Pty Ltd; ASIC v Carey (No 20) [2008] FCA 45.

‍[5]Go Energy Group Ltd [2019] NSWSC 558 at [15]; McGrath; Re HIH Insurance Ltd [2005] NSWSC 787 at [35] published as Appendix 1 to Re McGrath; HIH Insurance Ltd [2010] NSWSC 404.

‍[6]Tanning Research Laboratories Inc v O'Brien [1990] HCA 8 at [7]; (1990) 169 CLR 332; 1 ACSR 510.

‍[7]Ex Parte Greg Quin as liquidator of Flexi Staff Pty Ltd (In Liquidation) [2023] WASC 362 at [24].